Abstract

In law as well as economics, the most well-known aspect of Coase’s “The Problem of Social Cost,” is the Coase Theorem. Over the decades, that particular notion has morphed into a crucial component of Chicago law and economics — namely, transaction cost analysis.

In this Article, I deliberately bracket the Coase Theorem to show that “The Problem of Social Cost” contains far more interesting and unsettling lessons — both for law as well as for economics. Indeed, while Coase’s arguments clearly target the Pigouvian attempts to “improve on the market” through government correctives, there is, lurking in those arguments, a much more profound critique of neoclassical economics generally.

This broader critique has been all but eclipsed by the focus on the Coase Theorem and its main offshoot — namely, Chicago transaction cost analysis. Here, based on a close reading of “The Problem of Social Cost,” I retrieve Coase’s broader critique from its current obscurity to show its relevance and bite for contemporary law and economics. In particular, I deploy Coase’s thought to show that Chicago transaction cost analysis is, on its own terms, compromised.

Chicago transaction cost analysis has no theory capable of distinguishing transaction costs from production factor costs. It is accordingly incapable of delineating the circumstances when it is (or is not) efficiency-enhancing to “economize on transaction costs.” The surprising upshot is that despite its stated commitment to enhance efficiency, Chicago transaction cost analysis is instead engaged in a selective subsidization (or penalization) of various markets based on criteria that are at best opaque and quite possibly, incoherent.

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